Expedia (NASDAQ: EXPE) is a mammoth online travel company. Since its founding in the mid-1990s, the company has gobbled up many of its rivals to become the largest online travel agency in the United States.
Along that journey, media moguls John Malone and Barry Diller (Expedia's chairman) invested in the company. Because of their outsize influence, they received class B common stock and formed a separate company, Liberty Expedia Holdings, to house their shares.
In April, Expedia announced it would acquire Liberty Expedia in a deal that promised to create shareholder value by eliminating the dual-class share structure, making the company easier to value and improving corporate governance. The deal closed in July.
The deal's details
Expedia's acquisition of Liberty Expedia was structured as an all-stock deal where holders of Liberty Expedia received 0.36 shares of Expedia for each share they held. Liberty Expedia had 23.9 million shares of Expedia (common stock and Class B common stock). Expedia's overall share count actually fell by 3.1 million due to the company retiring its class B shares and differences in the share count denominators.
In exchange for acquiring Liberty Expedia, Expedia was able to bring share ownership back into one publicly listed entity instead of two. The Expedia stock held by Liberty Expedia accounted for 16% of Expedia's total shares outstanding and 53% of Expedia's voting interests. Expedia also received ownership of Bodybuilding.com, a small supplement website held within the Liberty Expedia umbrella.
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Improving corporate governance
The driving force behind this transaction is the prospect of improving corporate governance and simplifying Expedia's ownership structure. The class B shares carried 10 times the voting rights of the class A shares. Because of that large divergence, Expedia's publicly traded parent company was effectively controlled by a minority of shares held in a separate holding company.
Research has shown that investors prefer companies with good governance and stronger protections for minority shareholders and that a dual-class structure, such as the one that existed before this acquisition, is suboptimal in terms of governance.
Moving to a one-share, one-vote structure is more straightforward, and eliminating the Liberty Expedia holding company will make Expedia's stock easier to value. Investors will no longer need to scratch their heads over why a significant portion of the stock is held in an obscure vehicle. Expedia's valuation could see some uplift to the extent a corporate governance discount was applied to the stock's trading value.
The end of a proxy voting partnership
Diller and Malone each owned one-third of Liberty Expedia (the remaining third traded publicly), and the two media moguls had an agreement whereby Diller gave the voting power of his shares to Malone. In other words, Malone had outsize voting control over Expedia despite the fact that Diller serves as the company's chairman of the board.
The acquisition of Liberty Expedia ends this proxy voting agreement and in effect returns voting power to Diller. As a result, Diller has 29% of the voting power of the company, proportional to his ownership in Expedia. Of course, with 29% ownership Diller is still the company's largest and most influential shareholders.
Positive for shareholders
These developments are all positive for minority shareholders because they better align the voting interests with proportional economic ownership of shares. Academic research (and common sense) shows that corporate governance matters, giving investors a new reason to like Expedia's stock. And it will be interesting to see if the company makes any strategic changes now that Malone is no longer in control.
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